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2009 (1) TMI 314 - AT - Income TaxNature of expense - revenue or capital expenditures - Disallowance of licence fee paid to the Department of Telecommunication - amortized u/s. 35ABB - services provided by the assessee are governed under the Indian Telegraph Act, 1885 - In terms of Indian Telegraph Act, Department of Telecommunications granted licence to the assessee to establish, maintain and operate closed users group domestic 64 Kbps data network via INSAT Satellite System using VSAT. HELD THAT - The licence granted enables the assessee to carry on the business subject to payment of licence fees. This licence also enables the assessee to access the INSAT satellite owned by the Government of India so as to carry on its business. CIT(A) held that since the licence was granted which was right to carry on the business and was granted for a period of 10 years is an enduring benefit and hence capital expenditure. No doubt the licence was granted for a period of 10 years but the licence fees is payable annually. Therefore, the benefit available by making the payment of annual licence fee will last for that year only. If the assessee wishes to carry on the business in terms of licence agreement, licence fee is payable for subsequent year also. Therefore, the benefit of licence fee paid during the year endures only till the end of the relevant financial year and does not extend to subsequent financial year. The licence fees paid during the year was not for the whole term of the licence period but only relevant to the assessment year under appeal. The only reason for treating the expenditure as capital was that the assessee received an enduring benefit. Since the benefit endures only for the year under appeal and could not have been extended to the subsequent years, the licence fee does not give the assessee any enduring benefit in the relevant assessment years. But for the payment of licence fee the assessee could not have carried on the business during the year. For non-payment of licence fees, the licence could have been revoked. Therefore, the expenditure being specific to the year under appeal only and not extending the benefit to subsequent years cannot be considered as capital expenditure or an enduring benefit. We, therefore, hold that the expenditures being incurred in the course of carrying on the business are allowable as business expenditure u/s. 37(1). Similarly the payment made to WPC wing of Ministry of Communication is also the precondition for carrying on the business and based on the yearly user of the facility are to be considered as revenue expenditure. The expenditure allowable u/s. 35ABB is only that expenditure which is capital expenditure and not the expenditure which are otherwise revenue in nature and allowable u/s. 37(1). The decision in the case of Triveni Engineering Works Ltd. 1982 (4) TMI 61 - DELHI HIGH COURT relied upon by the ld DR on the contrary, supports the case of the assessee. In the said case the Hon'ble Delhi High Court held that the payment for technical know-how and services for a period of 10 years was not capital expenditure but revenue expenditure. We, therefore, delete the disallowance made for both the years. In the result, both the appeals are allowed. Deletion of disallowance being stipend paid - AO held that the expenses for imparting of practical training under the practical training stipend scheme and programme of apprenticeship training (PAT) are not allowable as no statutory obligation is caused on the employer under these two training schemes - HELD THAT - We hold that the assessee having employed the engineering graduates and utilized their services in the course of carrying on business having incurred business expenditure being expenditure allowable u/s. 37(1). The payments are not to apprentices under the scheme of Government but as per the practice adopted by the assessee to employ fresh graduates with professional qualifications. Till these graduates are confirmed, the assessee is under obligation to pay remuneration which though may be classified as stipend nonetheless is expenditure incurred in the course of carrying on business. Therefore, the expenditures are allowable as such. Deletion of disallowance claimed towards repairs and maintenance held by the AO as capital expenditure - HELD THAT - We find that the expenses have been incurred for replacement of faulty parts like mini circuits, batteries etc. The parts of machinery are replaced by vendors situated abroad but for bringing such parts, the assessee has incurred customs duty and freight expenses. These parts are supplied by vendors free as being within warranty period. The amount paid is for acquisition of replaced parts and is not for the machinery as such but only for some of the parts which fits into the larger machine. The Hon'ble Supreme Court in the case of CIT vs. Saravana Spinning Mills (P) Ltd. 2007 (8) TMI 16 - SUPREME COURT held that where each machine was an independent and separate machine capable of independent and specific function, the expenditure incurred for replacement thereof would not come within the meaning of current repairs . However, in the present case what is replaced is not the independent and separate machine but only parts of such machine. Therefore, the expenditures are allowable as revenue expenditure. Deletion of disallowance claimed towards repairs, maintenance (others) held by the AO as capital expenditure - The expenditures are for miscellaneous civil work at office complex, staircase work at office building, telephone cabling work, fixing of the weather shed, name plate in stainless steel, repairing and painting charges of sign board etc. The expenses also include painting work, miscellaneous and electric and cable work towards modification in telephone exchange room. Therefore, considering the nature of expenses, the amount is allowable as revenue expenditure. Disallowance on account of management fees paid to Max India Ltd - HELD THAT - We find that the AO has not made out any case how the payment to Max India Ltd. is covered u/s. 40A(2). AO has not arrived at the fair market value of such services. Under the scheme of the Act, no ad hoc disallowance can be made. Since the disallowance was made invoking the provisions of s. 40A(2) and since there is no material on record to suggest that the payment was made to person referred in s. 40A(2)(b) and is excessive or unreasonable having regard to the fair market value of the services or facilities, no disallowance is called for. In the result, the appeals of the assessee are allowed and that of the Revenue are dismissed.
Issues Involved:
1. Disallowance of license fee paid to the Department of Telecommunication as capital expenditure. 2. Deletion of disallowance of stipend paid. 3. Deletion of disallowance of repairs and maintenance expenses. 4. Deletion of disallowance of transponder hire charges. 5. Deletion of disallowance of management fees paid to Max India Ltd. Detailed Analysis: 1. Disallowance of License Fee Paid to the Department of Telecommunication as Capital Expenditure: The primary issue in the assessee's appeals was the disallowance of the license fee paid to the Department of Telecommunication, which was treated as capital expenditure to be amortized under Section 35ABB of the IT Act, 1961. The assessee argued that the license fee was for the use of services in connection with Satellite Transponder Space Segment and not a one-time payment. The payment was made quarterly and did not create a benefit of enduring nature, thus it should be considered as revenue expenditure. The Tribunal noted that the license fee paid during the year was not for the entire term of the license but only for the relevant assessment year. Since the benefit of the license fee paid endured only for the year under appeal, it could not be considered as capital expenditure. The Tribunal held that the expenditures were incurred in the course of carrying on the business and were allowable as business expenditure under Section 37(1) of the Act. 2. Deletion of Disallowance of Stipend Paid: The Revenue's appeal contested the deletion of disallowance of Rs. 10,48,133 being stipend paid. The AO had disallowed the expenses on the grounds that they were not statutory obligations. However, the Tribunal observed that the payments were made to probationary officers who were employed and utilized in the course of carrying on the business. The Tribunal held that the expenditures were incurred wholly and exclusively for the purposes of business and were allowable under Section 37(1) of the Act. 3. Deletion of Disallowance of Repairs and Maintenance Expenses: The Revenue appealed against the deletion of disallowance of Rs. 17,61,671 claimed towards repairs and maintenance, which the AO had treated as capital expenditure. The Tribunal found that the expenses were incurred for replacement of faulty parts and were not for acquiring new machinery. The expenditures were for maintaining the infrastructure in good condition and were considered revenue in nature. Similarly, the disallowance of Rs. 2,88,950 for repairs and maintenance (others) was also deleted. The Tribunal noted that the expenditures were for repair and maintenance of existing office premises and electrical installations, and thus were allowable as revenue expenditure. 4. Deletion of Disallowance of Transponder Hire Charges: For the assessment year 2001-02, the Revenue contested the deletion of disallowance of Rs. 2,53,90,824 paid to the Department of Telecommunication towards transponder hire charges. The Tribunal upheld the CIT(A)'s decision that the payment was for leasing space segment and was an integral part of the profit-earning process. The payment was annual and did not bring into existence any capital asset, thus it was allowable as revenue expenditure. 5. Deletion of Disallowance of Management Fees Paid to Max India Ltd.: The Revenue's appeal also included the disallowance of Rs. 15 lakhs on account of management fees paid to Max India Ltd. The AO had disallowed the sum under Section 40A(2)(b) of the Act. However, the Tribunal found that the AO had not provided any basis for treating the expenses as excessive or unreasonable. The Tribunal held that the expenses were incurred in the course of carrying on business and were allowable as such. The AO had not demonstrated that the payment was covered under Section 40A(2) or was unreasonable, thus no disallowance was warranted. Conclusion: In conclusion, the Tribunal allowed the appeals of the assessee and dismissed the appeals of the Revenue. The Tribunal held that the license fee and other expenditures were revenue in nature and allowable under Section 37(1) of the Act. The disallowances made by the AO were deleted, and the expenses were considered as incurred in the course of carrying on the business.
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